October 25, 2016

Peking University Director Blames Local Chinese Governments for Limited Land, High Prices

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Municipal governments in China have been selling land to industrialists and investors at artificially low prices for the past 10 years, leaving little land for residential development and causing home prices to skyrocket, said Zhi Liu, director of Peking University’s Lincoln Institute Center for Urban Development and Land Policy, at a lecture Monday.

“The price-income ratio in China is reaching a very dangerous point,” Liu said. “In Beijing, it’s over 30, which means if you work for 30 years and you don’t spend a penny of your salary — you save all of it for 30 years — you’re able to buy a reasonably-sized house.”

Liu compared this ratio to that of the United States, where he said the average American can earn enough money to buy a median-priced home in less than 10 years. The lecturer attributed the high cost of home ownership to policies that encouraged local governments to sell off tracts of state-owned land to outside investors at low prices.

In China, taxes are set by the central government, even though municipal governments are tasked with building and maintaining infrastructure, mitigating unemployment and providing social services to their residents. When a local government is strapped for cash, it cannot levy a new tax to raise the funds to provide those services, according to Liu.

Municipal governments are also prohibited by Chinese law from borrowing money directly. This issue has led many municipal officials to sell off tracts of state-owned land to industrialists from China’s urban centers and overseas investors, Liu said.

The land is sold at below-market prices, and sometimes even given away for free. Local officials are focused on the long-term revenue streams that come with industry.

“Once the industry is in place, you’ll get the business, you’ll get the [foreign direct investment], you’ll get the employment, you’ll get people coming to the city,” Liu said. “And then you’ll have the demand for real estate.”

Selling or giving land to industrialists gobbles up land that is already in short supply thanks to what Liu called one of the strictest farmland preservation policies in the world. Liu said food scarcity has always been a problem in China, and the central government has designated 1.8 billion mu — roughly 300,000 square acres — to be kept as farmland, leaving little land available for residential purposes.

Unlike land sold by municipal governments for industrial purposes, residential land is purchased by real estate developers, who then sell it to homebuyers at market prices, Liu explained.

In China, real estate is considered one of the country’s few stable investment options, according to Liu. Chinese banks offer low interest rates, and few are willing to gamble in China’s poorly regulated stock market. Real estate is a safer bet given the scarcity of land and the ever-increasing demand.

Many homes in Chinese cities are uninhabited and empty, purchased simply as holdings, according to Liu.

“The houses are empty,” he said. “They have no other way to park their money.” This practice has led to other societal problems, including resentment among China’s rural population, many of whom were displaced when their land was sold to industrialists, according to Liu. “Farmers lose their land, lose their livelihoods, and their compensation is not enough,” he said.

To alleviate these tensions, the central government has begun scaling back the hukuo system, which allotted people from cities certain services and amenities their rural counterparts did not receive. Liu added that migrant workers from the countryside who moved to the cities are now being offered certain services and amenities their rural counterparts did not receive.

Liu added that migrant workers from the countryside who moved to the cities are now being offered some services once reserved for urban-dwellers. However, phasing out of the hukuo system has also caused financial problems for municipal governments.

“In Beijing, we have estimated that if you have hukuo in the district where Peking University is located, your hukuo can be as valuable as 3 million RMB [roughly $443,000],” Liu explained. “If you have that hukuo, you can send your kids to the best school, and your housing unit has a very high price.”

With the Chinese economy cooling down in recent years, municipal governments have collected fewer and fewer taxes from industrial and commercial use of their land, according to Liu. There is even less money to pay for the social services offered by the hukuo system now, even as more and more people qualify for its benefits.

The state government has said it plans to introduce a property tax on residential real estate to raise money for municipal services, but Liu said the tax would be difficult for many Chinese homeowners to swallow.

“You ask them to pay property taxes, when they invested in their homes? In their minds, they did not have the concept of a property tax,” he said. “Today, if you asked them to pay, it would be very difficult.”